Sell-off in Reits sees 18 of top 20 actives close lower, resulting in 0.83% drop in FTSE FT Reit index

There were no real surprises yesterday as the Straits Times Index (STI) dropped 18.79 points to 3,232.47 in response to Wall Street's large overnight fall that came about because of concerns over the North Korea situation and the US government's debt ceiling.

What was surprising, however, was a large sell-off in real estate investment trusts (Reits) which saw 18 of the top 20 actives close lower. As a result, the FTSE FT Reit index recorded a 0.83 per cent drop.

Market watchers believe the Reit sell-off was a reaction to a proposed rights issue by Cache Logistics Trust, which comes just days after Manulife US Reit also announced a rights issue.

"The market may be thinking that this year will see more cash raising by the Reits," said a dealer.

"In this market, not many people are that keen to put more in. This is collateral damage from Cache and Manulife."

Cache ended $0.04 down at $0.815 on volume of 16.7 million while Manulife US Reit finished with a US$0.01 loss at US$0.935 (S$1.26) on turnover of 3.9 million. CapitaMall Trust was the most active, dropping $0.04 to $2.09 with 20.5 million traded.

As for Cache's rights issue, OCBC Investment Research said that using the bulk of the $102.7 million gross proceeds to repay existing debt would reduce Cache's gearing from 43.4 per cent as at June 30 to 35.5 per cent.

"We are positive on the dramatic decrease in leverage.

"Given the reduction in gearing, we lower our cost of equity from 9.6 to 9.1 per cent and lower our interest burden accordingly," said the broker, adding that it is upgrading Cache to "hold" with a cum-rights fair value of $0.81 and an ex-rights fair value of $0.78.

News reports attributed Wall Street's Tuesday plunge to a delayed response to North Korea's weekend nuclear test as Wall Street had been closed on Monday for Labor Day.

However, also notable was that not only did US stocks weaken on Tuesday, but also Treasury yields - which move in the opposite direction to prices.

The 10-year note's yield fell 0.085 point to 2.072 per cent (its lowest this year) while two-year yield declined 0.054 point to 1.292 per cent.

The one-month note, however, saw its yield rise to 0.9794 per cent from 0.9381 per cent on Friday, a move widely seen as the market's concern that the US government can win approval for its need to raise its debt ceiling in time to meet its payment obligations before the end of the month.

Bank of Singapore's chief investment officer Johan Jooste in his weekly strategy update said it looks like earnings expectations for global equities are being upgraded incrementally for the third quarter, which is surprising.

"The reason for surprise is the fact that the underlying macro picture has moderated more or less in line with our expectations," he said. "That makes further upside to earnings harder to achieve for the rest of the year."

CMC Markets said that the impact of tension surrounding the Korean peninsula on the Singapore stock market is likely to remain limited to the sentimental level rather than the fundamental, if the US can eventually resolve the issue diplomatically.

This article appears in The Business Times today. For full listings of SGX prices, go to btd.sg/BTmkts